Deposit insurance is an avenue to strengthening the customer’s confidence in the banking system. In most countries, there is a provision to save the money deposited by depositors. In India, the DICGC is authorized with the task of safeguarding the depositor’s interest in case the bank fails or merges with other banks.
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The main objective of deposit insurance is to boost the faith of customers in the banking system. The deposit insurance is mainly introduced to cover the losses on deposits to a significant extent. In India, bank deposits like FDs, RDs and savings and current account deposits are insured under an insurance scheme extended by the Insurance and Credit Guarantee Corporation of India (DICGC). The DICGC is a subsidiary of the RBI that ensures depositors get their money back up to a certain amount when the bank fails or liquidates. Depositors must pay an insurance premium to avail deposit insurance protection.
See Also: How Safe Are Your Fixed Deposits?
In India, the deposit insurance was introduced when a statutory body DICGC was established. The Deposit Insurance and Credit Guarantee Corporation of India are fully owned by the RBI.
The banks enrolled under the scheme must pay a premium at the rate of 10 paise per Rs. 100. The total coverage amount is capped at Rs. 1 lakh per depositor. The DICGC build a deposit fund from the insurance paid by the insured banks and the coupon received from investment in government securities. In the event of bank failure or in case the bank merges with other banks, the DICGC steps in and protects bank deposits. The DICGC insures all deposits and pays each depositor a specific amount as compensation.
All the commercial banks including Local Area Banks and Regional Rural Banks in all states and union territories must compulsorily enrol under this scheme. All co-operative banks across the country are also covered under this scheme expect for co-operatives in three union territories i.e. Lakhswadeep, Dadra and Nagar Haveli and Chandigarh.
See Also: Benefits of Fixed Deposit in India
The banks insured under the DICGC act pays a premium of 0.001% of their deposits to DICGC every year. In case the bank insured under the DICGC insurance fails or undergoes liquidation or if the bank merges with another bank, then DICGC is liable to pay the amount due to the depositors. The payment is made via an officially appointed liquidator within a given period. The claims are generally settled within 2 months from the receipt of the claim by the liquidator.
All commercial and co-operative banks are covered by the DICGC scheme. But there are a few exceptions. The below-listed institutions are not covered under the deposit insurance scheme:
See Also: Fixed Deposit Vs Fixed Maturity Plan
When the bank liquidates or fails then the depositors become eligible to receive an insurance amount of Rs. 1 lakh from the Deposit Insurance and Credit Guarantee Corporation of India. The money is paid to every depositor as compensation. The 1 lakh insurance limits are inclusive of both the principal and interest amount due across your deposit accounts that include FDs, RDs, current and savings account.
The DICGC insures all types of deposits including fixed deposit, recurring deposits, savings and current deposits. You can maximize your deposit insurance cover by diversifying your deposit across multiple banks and holding types i.e. individual and joint account.
If you have deposits in different branches of the same bank, then you will receive a maximum compensation of up to Rs. 1 lakh. The DICGC adds all funds held at different branches by the depositor before determining the deposit insurance. Funds held under separate ownership are insured separately. Now if you have two separate accounts in two banks and both of them undergo liquidation then you are covered separately.
See Also: How To Choose the Best FD?
To understand it better, we may take the following example:
If you have an amount say, Rs. 3 lakhs then instead of investing the entire sum in a single deposit try and split it into different FDs/RDs across different banks. You can benefit by splitting your money across separate FDs or RDs and can also invest in single or joint account types. Under the deposit insurance scheme, the banks are providing an insurance cover of Rs. 1 lakh on every type of deposit. Therefore you can split your corpus (3 lakh) into three separate deposits and stay insured. If the bank liquidates, you will be able to get maximum insurance on your deposit.
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